Management Seller’s Market: 10 Tips for Selling in an Active Mergers & Acquisitions Landscape

In an environment of continued economic growth and increased optimism about the future of the waste and recycling industry, company owners may soon find themselves considering opportunities to sell. These 10 tips will go a long way in facilitating a successful and rewarding sale process.

Bradford Page

 

Mergers & Acquisitions (M&A) activity in most industries is characterized by peaks and valleys, as acquirers’ expansion appetites ebb and flow along with the economic cycles. The solid waste and recycling industry, however, has traditionally seen consistent M&A activity with small companies looking to grow and large companies looking to fill in new regions or expand density in existing regions.

 

The bifurcation of the industry—with several $1 billion+ revenue corporations at one end of the spectrum and countless sub-$100 million revenue local operators at the other end—means there is a steady, naturally recurring supply of attractive targets for acquirers. The relatively stable nature of revenues in the waste industry has added to the consistency of M&A volumes in the space.

 

Despite this historical consistency, the waste and broader environmental services industry has seen a noticeable uptick in M&A activity over the past several years. Precise data on M&A valuation is difficult to obtain, so we use public market valuation as a proxy. Two conclusions can be drawn from looking at publicly traded businesses in the industry: first is that valuation has been generally stable over the past three and a half years; second is that valuation has hovered near 10 times trailing EBITDA (earnings before interest, taxes, depreciation and amortization). When buying a business, purchasers will typically place a premium on size and consistency, comparatively larger companies with a predictable and consistent customer base tend to receive a premium valuation—whether in franchise markets or otherwise. In an environment of continued economic growth, owners of smaller waste and recycling businesses are rightly enthusiastic about their growth opportunities, and large corporations are looking to capture incremental volumes through increased route density and other inorganic growth strategies.

 

Drivers of Consistent M&A Growth

From 2012 through the last 12 months ending in June 2015, the number of M&A transactions in the environmental services sector remained largely constant with nearly one transaction every other business day. Valuations for publicly traded environmental services companies peaked at a median 10.9 times trailing EBITDA in 2013 and have remained near that high. These two factors point to continued strong demand from both strategic and private equity acquirers in the second half of 2015.

 

Acquirers have been—and will continue to be—aggressive in their pursuit of companies that have successfully deployed technologies and processes that enhance environmental sustainability. Companies that have adopted environmentally friendly practices, such as truck fleets that run on natural gas, route-optimization software to maximize each truck’s efficiency, or single-stream recycling alternatives to better capture the evolving waste stream, are more attractive acquisition targets than companies that are behind the curve and require a buyer to infuse capital immediately after the purchase. Waste businesses that are vertically integrated may also receive a premium, but that is not always the case with variability partially driven by disposal options in the area.

 

Top 10 Tips for Selling Your Company

Within this environment of strong buyer demand, many owners of waste and recycling companies are wondering if now is the appropriate time to consider selling. In our conversations with these business owners, our message is consistent: while it is impossible to know when the M&A market will peak or trough, there are many things that a seller can do to increase the odds of a successful transaction at a premium valuation. Based on our experience, outlined below is a top 10 list of things a seller can do to achieve a successful outcome.

 

#1: Prepare Early and Often

As is the case with most things in life, preparation is essential to a successful sale process. You need to be what we refer to as “battle ready,” meaning you need to spend time doing financial and market analysis and asking the tough questions before you decide to sell. For example, be sure to understand your routes and ways to increase density; disposal options and alternatives; competition in collection, transfer stations and landfills; safety history and training protocols; record of price and volume; and ways to grow given the opportunity.

 

#2: Build Your Team

You relied on the strong team around you as you grew the company, and the sale process should be no different. It is important to involve other senior executives and showcase their value to the organization. Buyers like to see that not all of the company’s intellectual value and managerial expertise resides with one person. It’s also important to build a team of trusted financial, accounting and legal advisors to guide you through the sale process. And once you’ve assembled this team, rely on them for advice and guidance. They do this for a living, and they are here to help.

 

#3: Define Management’s Current and Future Roles

Buyers will want to understand how important management positions are filled. In addition to the CEO and CFO, you will want to identify who is responsible for vital functions such as sales, human resources, driver recruiting, safety and training. Buyers will seek your input on who should reinvest in the transaction and/or receive stock options. Accordingly, before a sale you should determine who on the team will be in leadership roles going forward, identifying any promotions and/or retirements.

 

#4: Appreciate the Time Commitment

When you plan to sell your business, it is important to realize that you are signing up for a process that generally lasts six months. Meetings and phone calls with potential buyers and their advisors take up time from the CEO and other executives. The management team needs to have a plan in place for how they can continue to run the business while meeting the day-to-day demands of the sale process. Often, this means the CEO will have to delegate some of his or her regular responsibilities.

 

#5: Make Sure Your Financials Are in Order

A big part of any potential buyer’s due diligence will be evaluating your company’s financial performance. It is important to have a full audit (rather than a review) done before initiating the sale process (see Audits: An Important Step in Preparing for a Sale, page xx). Some sellers also hire an accounting firm to complete a Quality of Earnings study to confirm the financial health, accounting practices and profitability of the company. Going through the audit and/or Quality of Earnings process will give you a chance to address any potential issues before buyers begin their review. You will also want to create a professional-looking, cleanly formatted presentation of your monthly and annual financial statements to share with buyers. It may sound strange, but appearances matter when it comes to your financial reporting.

 

#6: Develop Projections that You Can Defend with Confidence

For the forward-looking aspects of your financials you need to use budgets and projections that are realistic, achievable and defensible. It is a good habit to build annual budgets and multi-year projections, if possible. If business drivers (metrics) such as tons collected, price or commodity rates are important, be sure to use them in your budgets and have sound logic to support your assumptions. Avoid using overly complex or inconsistent forecasting techniques that may be hard for buyers to understand. Buyers will evaluate your history of achieving budgeted projections when assessing value.  The more accurate your budget track record, the more value buyers will give you for future projected earnings.

 

#7: Understand What You Want in a Buyer

Finding the right partner for your company is a very important part of the sale process. It is important to understand the different capabilities, resources and opportunities that private equity and strategic buyers provide and determine the best fit for you, the company and your employees. Before you start a sale process write down the qualities you are seeking in a buyer. Make sure that your advisor thoroughly screens potential partners upfront and allows you the time needed to get to know the buyers both professionally and socially.

 

#8: Listen and Learn

A sale process can be very insightful. Buyers will ask you challenging questions about your company’s market, strategy, customers and growth plans. They also bring a wealth of experiences and feedback. Not surprisingly, we find that most owners learn a lot about their businesses, and how to improve their operations, during the sale process. Make sure to listen, learn and take good notes. You will sell your company to one buyer, but you can learn from all of them.

 

#9: Have a Communications Plan

Have a plan in place for how you will communicate the sale, and the opportunity it provides, to both employees and customers. Whether you communicate before or after a sale, it is important to be prepared and designate who on the team will help manage communications.

 

#10: Have Fun

The sale process can be consuming, but it should also be fun. Don’t lose sight of the fact that the opportunity to sell the company represents a reward for the hard work and sacrifice you and your employees have made over the years. Furthermore, it represents an opportunity to enhance the future with a new partner and recognize new potential from additional growth capital, additional potential acquisitions or being part of a larger and more diversified organization. Throughout the sale process, you will meet people who are incredibly interested in learning about the company you have built and who want to partner with you—be proud of what you have built and enjoy the process.

 

In an environment of continued economic growth and increased optimism about the future of the waste and recycling industry, company owners may soon find themselves considering opportunities to sell. If you, as a business owner, decide to pursue those opportunities, the 10 tips listed above will go a long way in facilitating a successful and rewarding sale process.

 

Bradford Page is a member of William Blair & Company’s (Chicago, IL) investment banking team and is the Head of Environmental & Industrial Services practice. William Blair works closely with public companies, private companies, business owners and private equity investors on transactions related to M&A, equity capital and debt capital. Brad can be reached at (312) 364-8969 or via e-mail at bpage@williamblair.com.

 

Sidebar

Audits: An Important Step in Preparing for a Sale
Having an audit done before initiating a sale process helps to assure potential buyers regarding the accuracy and completeness of your company’s financial statements. During the audit process, the auditing firm will:

  • Evaluate internal control systems
  • Test appropriate revenue recognition
  • Test accounts receivable and payable
  • Provide an opinion that the financial statements, in all material respects, are presented in accordance with U.S. GAAP